A Toronto tax lawyer's guide to basic personal amount tax credit

Author: Rotfleisch & Samulovitch P.C.

Source: Mondaq.com

The Basic Personal Amount (BPA) is a non-refundable tax credit that can be claimed by all individuals who are Canadian tax residents. The amount that a taxpayer is entitled to claim is based on the taxpayer's net income and his or her tax residence in Canada.

There are two sets of Basic Personal Amount that are applicable to Canadian taxpayers. The Federal Basic Personal Amount deducts Federal income tax for all taxpayers using the same thresholds across Canada. The provincial Basic Personal Amount is determined by each province with different thresholds and application rules.

This article discusses the Basic Personal Amount rules that are applicable to an Ontario resident and concludes by offering pro tax tips from our top Canadian tax lawyers.

Tax Residence and the 90% Rule  

Individuals who are Canadian tax residents are entitled to claim both the federal and provincial Basic Personal Amount on his or her income tax return. An individual's tax residence, namely a person's residence status for the purpose of filing Canadian tax, is determined by various factors. Taxpayers with significant residential ties - specifically, a home, a spouse, or a dependent in Canada - are very likely to be deemed a factual tax resident in Canada.

However, if you have recently returned or moved to Canada, the 90% rule may be applicable when it comes to tax filing and your entitlement to the Basic Personal Amount. An immigrant or emigrant may be deemed a part-year resident in the year of arriving or leaving Canada. Part-year residents are entitled to the full Basic Personal Amount if, during the period of non-residency, his or her Canadian-source income reported is 90% or more of the taxpayer's net worldwide income. Additional documents and statements may be required if a part-year resident claims full Basic Personal Amount. If a part-year resident does not meet the 90% rule, then his or her entitled Basic Personal Amount will be proportioned to the period of residency.

Calculating Federal and Provincial Basic Personal Amount  

The Federal Basic Personal Amount changes year to year, to keep up with the inflation. In 2021, the Federal Basic Personal Amount was set at $13,808 for taxpayers with a net income of $150,473 or less. For 2022, the net income threshold for full amount deduction increases to $151,978.

Even though a Canadian taxpayer files both federal and provincial income taxes on one return, each province has a different system for assessing an individual's Basic Personal Amount. The full Ontario Basic Personal Amount, as an example, does not change based on the net income of the taxpayer. Rather, Ontario imposes an additional tax, surtax, on taxpayers with annual income over a certain threshold.

As a tax credit, the Basic Personal Amount can appear to be confusing as the amount is not the actual tax deducted but the base for deduction. The actual deduction from your tax liability is computed by the Basic Personal Amount multiplied by the lowest tax rate in the income tax bracket. If you make less than the Basic Personal Amount, this tax credit effectively exempt you from paying any income tax. A Toronto taxpayer who has earned $50,000 in 2021, for instance, is entitled to the federal Basic Personal Amount deduction of $2,071.20 ($13,808*15%) and the Ontario Basic Personal Amount deduction of $549.44 ($10,880*5.05%).

The Net Income Threshold  

There are two criteria in calculating a taxpayer's entitlement to the Federal Basic Personal Amount. The first criterion is the net income reported by the taxpayer in a tax year. For example, if your 2022 net income is $216,511 or more, your federal Basic Personal Amount will be reduced to $12,421. For anyone with a net income of $151,978 or less, he or she can claim the full federal amount of $13,808. You will need to do a calculation to determine your Basic Personal Amount if your 2022 net income is between $151,978 and $216,511.

The Ontario Basic Personal Amount remains the same regardless of a taxpayer's net income or taxable income. Instead, Ontario imposes an additional tax on taxpayers whose taxable income exceeds $81,411. The 2022 Ontario Basic Personal Amount is set at $11,141.

Transferring Basic Personal Amount to Your Spouse  

The non-refundable tax credit can only be used to increase a taxpayer's refund if his or her net income is greater than the Basic Personal Amount. Alternatively, you may be able to transfer your unused Basic Personal Amount to your spouse, common-law partner, or eligible dependent. An eligible CRA dependent for tax purposes includes parents or grandparents who are dependent on the taxpayer, a child who is under 18 years of age, or an adult child who has mental or physical disability.

If you were separated from your spouse or common-law partner for 90 days or more within the year because of a relationship breakdown, you and your spouse or common-law partner are not eligible to transfer any unused amounts when filing your taxes. Additionally, the net income and tax residence of your spouse, common-law partner, or eligible dependent may limit the maximum tax credit transfer he or she can receive.

Pro Tax Tips - Saving Tax By Timing Your Arrival And Income  

For part-year residents, the date that you have arrived in Canada and your worldwide or foreign income affect the Basic Personal Amount to which you are entitled. You can choose to either arrive early in the year if you are certain that your Canadian income will not exceed 90% of your worldwide income to maximize the Basic Personal Amount you can claim. The longer you spend in Canada when being a part-year resident, the more you can claim. Alternatively, you may structure or plan your worldwide income to make sure that your main source of income is in Canada.


How Much Basic Personal Amount Can I Claim In My Tax Return?

The calculation primarily depends on your net income and your tax residence. If you are a Canadian tax resident for the full year, you are entitled to claim the full Federal and Ontario Basic Personal Amount when filing your income tax. For 2022, the full Federal Basic Personal Amount is $14,398 and the full Ontario Basic Personal Amount is $11,141.

What Is The 90% Rule?

The 90% rule applies to taxpayers who have not been a Canadian tax resident for an entire year, whether they are departing from or arriving at Canada. As a result, they may only be entitled to the full Basic Personal Amount deduction if 90% of their net worldwide income is Canadian-sourced. Otherwise, their entitled amount will be prorated based on the length of their tax residence in Canada.


This article was written by Rotfleisch & Samulovitch P.C. from Mondaq.com and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to legal@industrydive.com.